First of the Month U.S. Economic Data

April ADP Employment was reported at +119,000, below last month’s +131,000 and consensus estimates for this month of +150,000.

The March ADP Employment report was revised lower, from +158,000 to +131,000.

This morning’s ADP report raises concerns that a second consecutive disappointing labor report is coming on Friday. In fact, consensus estimates for Friday’s April Nonfarm Payroll report have been lowered to the following:

Change in Nonfarm Payrolls +130,000 to +150,000, higher than last month’s +88,000, but a lower estimate than last week’s +160,000 to +180,000 expectation

Change in Private Payrolls +150,000 to +170,000, higher than last month’s +95,000, but a lower estimate than last week’s +185,000 to +190,000 expectation

The previous month’s construction spending was revised higher to +1.5% from a previously reported +1.2%.

The (-1.7%) decline brings the annual rate of construction spending to $856.7 billion, the lowest level since August 2012.

Public projects contracted by slightly more than 4%, the largest decline since March 2002.

This disappointing report presents the first evidence that sequestration is impacting the overall economy. This also places at risk current estimates for first quarter GDP; closer to 2.0% versus 2.5%.

U.S. Construction Spending, Annual Rate

Source: Bloomberg

10:00 AM: April U.S. ISM Manufacturing

April U.S. ISM Manufacturing Index declined to 50.7 from 51.3; consensus estimates were for a decline to 50.5.

Investors should focus solely on one metric: the new orders to inventory ratio increased to +5.8 from last month’s +1.9. This suggests any second quarter contraction in the U.S. economy should be viewed as temporary.

April

2013

March

2013

February

2013

January

2013

New Orders

52.3

51.4

57.8

53.3

Inventories

46.5

49.5

51.5

51

New Orders to Inventory Ratio

+5.8

+1.9

+6.3

+2.3

Employment

50.2

54.2

52.6

54

Production

53.5

52.2

57.6

53.6

Prices Paid

50.0

54.5

61.5

56.5

Source: Bloomberg

2:00 PM: FOMC Rate Decision

The FOMC concluded its two-day meeting this afternoon with a 2:00 p.m. statement that it will maintain its current pace of QE purchases at $85 billion per month. However, the committee introduced new language that suggests for the very first time the amount of purchases could exceed $85 billion per month:

“The committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.”

Additionally, the statement once again chided fiscal policy, citing that it has become even more restrictive to growth. I expect that as the Fed chairman concludes his final year in office, his criticism toward restrictive U.S. fiscal policy will only amplify.

The committee tied its ability to vary the amount of QE monthly purchases to the risk of inflation falling further. I expect the U.S. economy is most challenged by the potential downside risk to inflation. Therefore, investors should not expect any tapering of the monthly bond purchases over the next few months.

The next FOMC meeting will be June 18-19.

Past performance is not a guarantee of future results.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.